L4M2 - Defining Business Needs Flashcards
What is a liability?
Being legally responsible for something
What is a business case?
A justification for a proposed project or undertaking on the basis of its investment and cost implications balanced against its expected benefits
What are corporate goals?
The targets set by an organisation or company that will achieve the organisation’s mission or objectives.
What is a straight rebuy?
Straightforward repurchase of an item bought previously, rather than considering an alternative.
Straight rebuys are often a call off from an existing contract or framework agreement
What is a modified rebuy?
A product/service that has been sourced before but requires a slight change prior to being rebought.
What is a new purchase?
The purchase of an item for the first time.
What are some examples of a straight rebuy?
MRO items - routine items that are used for the running of an organisation e.g spare parts for machines
Stationary Items
Raw materials such as steel and bulk chemicals
How risky is a straight rebuy?
Low risk as there are usually alternative suppliers and cost of switching is low.
What are some examples of a modified rebuy?
A buyer sets a cost reduction target for the year and so attempts to get the same item for a lower price from the same supplier
A buyer reviews the number of suppliers it has and finds that it has multiples uppliers for the same product - the buyer chooses one supplier and renegotiates terms to get volume discount
A change in regulations means that a product has to be modified so component specification must change
What is an approved supplier?
A list of approved suppliers who have the skills to undertake the work.
What is a call off?
The purchase of an item using a framework agreement that has already been through a procurement process
What is a framework agreement?
An arrangement that is put in place with one or more suppliers for the supply of a range of goods or services in which the prices and terms are all agreed for the duration of the agreement.
What is a volume discount?
A reduction in the usual price when a minimum quantity is ordered (bulk discount)
What are some examples of new purchases?
A new product is added to an organisation’s offer, that uses materials or components not sourced before
Changes to legislation which mean a public sector department has to offer a new service that requires skills and experience not otherwise required
Technology changes and new equipment is needed
What is the critical path?
The sequence of steps in a project that together determine the shortest time to complete the project
What is a business requirement?
The activities that meet the need of and provide value to the business
What is a specification?
A detailed description of the product or service required
What is the supply market?
The marketplace in which suppliers conduct business
What are key suppliers?
Externally located suppliers who are essential to the successful delivery of a business’ objectives
What is an invitation to tender?
A formal invitation sent to suppliers inviting them to make an offer to supply goods or services
What are regulatory bodies?
Public authorities or government agencies that have responsibility for overseeing and supervising a specified activity.
What is capacity?
The measure of the rate at which the operations function can transform its inputs into a quantity of product or service outputs in a given timescale
What is a method to identify business needs?
RAQSCI
What are the 6 themes of RAQSCI in order?
- Regulatory
- Assurance of supply
- Quality
- Service requirements
- Cost
6.Innovation
What are target costs?
The expected costs of making a product or service
What are whole-life costs?
An estimate used to help determine the end-to-end cost of providing a service, manufacturing, or procuring a product.
What are benchmarked prices?
Comparing an element of one business such as price, quality or service, against another
What is continuous improvement?
An ongoing effort to improve products, processes and services
Why is the order of the RAQSCI model crucial?
It focuses attention on potential trade-offs that may have to be made.
What is a key point to remember when defining business requirements?
Remembering to involve a range of stakeholders within the organisation allows procurement professionals to take into account the different stakeholders’ conflicting needs and to agree in advance on any compromises that must be met.
What are the business needs used for?
Business needs are useful as they inform a range of procurement activities including:
Defining evaluation criteria
Testing the available options to ensure that they satisfy the company’s needs
Developing performance measures
Re-evaluating your sourcing strategy if circumstances change
What is a sourcing strategy?
A plan for creating an advantage by continually reviewing current needs against purchasing opportunities
What is meant by regulatory in the RAQSCI model?
The need to cover any legal requirement or requirements of regulatory bodies
What is meant by assurance of supply in the RAQSCI model?
This covers the continuing supply of goods and services when required and is based on factors such as capacity, financial stability and risk
What is meant by quality in the RAQSCI model?
This is the consistency, repeatability and how fit for purpose the procured goods are
What is meant by service requirements in the RAQSCI model?`
These are factors associated with the way services are supplied, for example, flexibility and availability
What is meant by costs in the RAQSCI model?
It is only after the other factors have been met that cost should be considered, in aspects of both cost and price
What is meant by innovation in the RAQSCI model?
It is necessary to look for innovation, particularly in terms of the means of improving the customers’ experience. An example is the use of emerging technology.
What should be considered when defining business requirements?
Collect information relating to the organisation’s desired future state
Categorise all potential stakeholders
Identify individuals who contribute tot he acquisition, manufacture or use of the product.
On completion, the analysis should be shared with all shareholders
What is the sourcing strategy for a modified rebuy?
- Define the scope of spend
2.Assess the current spend - Assess the supply market
- Analyse the total cost
5.Identify suitable suppliers - Develop a strategy
- Decide the route to market
8.Decide how to implement new supply arrangements - Decide how to track results
- Define the trigger events that will start the sourcing process.
What Questions should we ask when deciding a sourcing strategy?
Are there geographical boundaries that need to be considered?
What time period should the strategy cover?
Are there any organisational boundaries that need to be considered? For example, a collaborative agreement.
What is a collaborative agreement?
A long term agreement between a buying organisation and a selling organisation which sets out how each party proposes to share information, costs, risks, and results by working together
What are the risks of a new purchase?
Marketing needs to agree that the attributes hit the required level of quality
Engineering needs to ensure that the item meets technical requirements
Manufacturing needs to be assured that this can be used in manufacturing process
Finance needs to agree that the cost of the item enables the price to be maintained
What is a closed problem?
These appear when something happens that should not have hapenned
What is an open problem?
These happen where something is stopping the achievement of an objective or blocking progress
What is an example of a closed problem?
The price of a key raw material suddenly increases and makes the product less profitable
What is an example of an open-ended problem?
Agreement from senior management is required for an additional budget to hire people into the new organisation structure
What is the Kepner-Tregoe approach?
This is an approach to closed problem solving which asks questions in order to build a detailed definition of the project we’re trying to solve.
What is a cost-out approach?
The elimination of a cost in the manufacture of a product by removing an item from the specification
What is a cost-down approach?
The reduction of a cost in the manufacture of a product by means of changing an item specification
What does SCAMPER stand for?
Substitute
Combine
Adapt
Modify
Put to other uses
Eliminate
Reverse
What is SCAMPER used for?
Each of the key words is used to frame a question for the problem to stimulate the generation of options to solve it
What is a RACI matrix?
It is a matrix to decide roles and responsibilities when implementing a plan. Responsible, accountable, Consulted, Informed.
Outline the eight step process for problem solving in procurement.
What is the current situation?
What do we know?
What are the underlying issues?
What are the strategic options?
What is the best option?
How should we implement the plan?
Have we achieved our objectives?
What can we improve?
What is ROI?
A measure of profitability that indicates whether a gain or loss has been generated compared with the initial cost
What is an executive summary?
A clear, persuasive, and comprehensive summary of the business case
What factors should be used in a business case to appeal to senior management?
ROI, Time to market, Customer satisfactionW, managing risk
What is desk research?
Secondary research involving gathering information from already published sources
What is field research?
Field data is the collection of original or raw data (primary data), which can be qualitative or quantitative
How to ensure the you collect accurate, unbiased data?
Suitable sample size, ask the right questions, avoid leading questions, consider reliability, analyse fairly
What is market penetration pricing?
Using a low price to secure large market share
What is market skimming pricing?
In the absence of competition, pricing high to make large profits
What is cost-plus pricing?
production costs are calculated, and margin added for profit
What is a request for information?
A document used to gather information about suppliers and capabilities prior to a formal quoting process
What is a request for quotation?
An invitation for suppliers to bid on specific products or services
What is a request for proposal?
A document used to canvas potential solutions from suppliers when the specification is still unclear
What is porter’s value chain?
A business model created by Michael Porter that details the set of coordinated processes, people and resources within an organisation that generate corporate value
What are the primary activities in Porter’s value chain?
Inbound logistics
Operations
Outbound Logistics
Sales and Marketing
Service
What is the break even point?
The level of output of a business at which revenue equals total costs
What is the formula for the breakeven point?
Q = F/(R-V)
What are super-profits?
Excess of average profit over normal profit
What is procurement cost analysis?
The analysis of the cost of individual materials, components, and activities that make up an item. Essentially, are prices paid the best they could be?
What is the quality function deployment?
A structured approach for defining requirements and translating them into product specifications
What are the three types of price comparisons that can be made in price analysis?
Prices that have been paid in the past - will need to normalise these prices based on inflation
Published prices
Pricing formula (using benchmark figures to calculate expected)
What should we not use competitive bidding for price analysis?
When it is impossible to estimate costs with a high degree of certainty
When price is not the only variable ( service level may be a variable)
If changes to specification are anticipated
What are whole life costs?
Whole-life cost is the total cost of ownership over the life of an asset
What is whole life asset management?
WLAM is the process of evaluating the total price and all associated costs of a product to make an informed decision at to which option is best value for money?
Which costs should be considered under WLC?
Acquisition costs, processing and maintenance cost, end of life costs, and non-value added processes
What is the Total Cost of Acquisition?
The total cost incurred in acquiring a product from sourcing to receiving and installing
What is one type of simulation model?
Monte Carlo Model
What is the Monte Carlo Model
A mathematical technique that generates and uses random numbers in the modelling of risk - a type of simulation model
What are simulation models useful for?
Simulation models tell you which variable has the biggest impact on the result
What is an optimisation model?
These are most frequently used to calculate support costs, such as inventory levels or maintenance regimes
Which model might be useful for calculating safety stock?
Optimisation model
What are the three trends that can help you identify whether an objective is strategic or not?
External trends i.e. economic/political factors
Internal trends - trends within the organisation e.g roles, size
Performance trends
What are the six types of intervention to create a breakthrough procurement business case?
Market interventions
Technical Interventions
Cost Structure Interventions
Work Process Interventions
Supplier relationship interventions
Supply Chain Interventions
How to test hybrid strategies?
List criteria that the strategies need to address, and then compare them with the current strategy to see if more or less effective.
What costs does cost-benefit analysis take into account?
Payback time, set up costs, etc. but also other costs such as impact on health and safety or environmental costs
What is internal benchmarking?
Where a business process is compared to a similar process in the same organisation
What is competitive benchmarking?
Were a product is benchmarked against that of a direct competitor
What is functional benchmarking?
Where similar practices are compared with those of an organisation outside of the immediate industry sector
What is generic benchmarking?
Looks at unrelated business processes or functions regardless of the industry
What are financial ratios?
Analysis using data from financial statements to identify and monitor trends in performance, such a profitability or debts
What is return on capital employed?
A financial ratio which identifies a business’ ability to generate profit from the capital used
What is net present value?
An accounting term for an amount in the future adjusted to today’s value
What is a cost model?
A process designed to assess and calculate all costs associated with producing or delivering a product or service and arrive at a provable end cost
What is working capital?
There must be sufficient funds in the bank to pay what the business owes before it receives funds from people who owe it. This amount of money is called the working capital.
What are the main steps in the cash flow model?
Receive raw materials and components
Manufacture products
Store in inventory
Pay suppliers
Sell Products
Receive funds from customers
What is an accrual?
An adjustment made to a set of financial accounts to reflect activity that has occurred but for which cash has not be received
Why might an item have a different value in the profit and loss than that in the cash flow statement?
Timing differences (accruals vs cash basis)
Depreciation
Changes in working capital
Loans and dividends impact the cash flow statement but not in the P&L as they are operating cost
What is a zero based budget?
A level of budgeting in which every expense must be justified starting from a base of zero, to force innovation
How to calculate quantity variance in budgeting?
(q1 - q2) p1
How to calculate price variance in budgeting?
(p1 - p2) Q2
Why do we focus on quantity or price variance in budgeting?
It tells the business whether price change or quantity change was the most important driver of cost variance, so we know what to focus on.
What are the 3 general strategies for competing in an industry?
Cost leadership
Differentiation
Focus an narrow niche segment
What is cost leadership?
A strategy used by business to gain competitive advantage by having the lowers cost of operation within the industry
What are the variables that can lead to different market segments?
Product/Service Segment
Buyer Segment
Channel Segment
Geographical Segment
What is a distribution channel?
The network used to get a product or service from the manufacturer to the consumer
What is the kraljic matrix?
A strategic tool to help managers recognise the weaknesses of their organisation and form strategies to guard against disruption of suppliers
What is Porter’s Five Competitive Forces used for?
It determines the ability of organisations in the industry to earn a profit that gives an acceptable return on the financial investment made by each organisation.
What are Porter’s Five Forces?
New Entrants
Substitutes
Buyer Power
Supplier Power
Rivalry
What factors decide the degree of rivalry between organisations in a competing industry?
Many or equal size suppliers
Slow Industry Growth
High Fixed Costs
Lack of differentiation
Capacity is added in significant amounts
High exit barriers
What is supplier bargaining strength?
If supplier bargaining strength is high then they can keep the price of the product high and so retain more profit.
What is buyer bargaining power?
Buyer bargaining power is the ability of one or more groups of buyers to keep prices low and so take more of the profit that is available.
What are the stages of the product life cycle?
Introduction
Growth
Maturity
Decline
What are the middle majority?
A group of consumers who buy a new product after seeing it be successfully used by early adopters
What are laggards?
The last group of consumers who buy a new technology
Which factors affect supplier bargaining power?
Substitutes
Size of the supplier in the industry
The suppliers product is important part of the value chain
Switching costs
Which factors affect buyer bargaining power?
Buyers are more concentrated than sellers
Buyer switching costs
Price sensitivity of buyer
Information of buyer
Differentiation of the product
Quantity purchased as a proportion of suppliers sales
What is a key factor to consider when thinking of substituting?
The economics of substitution
What is the economics of substitution?
There are 3 aspects:
The relative value-to-price ratio of the existing product and the substitute
The switching costs involved
The inclination of the buying organisation to switch
What is the relative value to price?
The value that a product provides in meeting needs compared to its purchase price
What are the two switching costs?
The cost of switching to another product and the cost to switch to another supplier
What are the aspects of buyer inclination?
Resources such as access to finance
Risk profile
Technological understanding
Previous substitutions
Intensity of rivalry
Buying organisations strategy
What are the barriers to a new entrant?
Economies of scale
Product differentiation
Brand Identity
Capital Requirements
Access to distributions
Access to technology
What is should-cost analysis?
Should-cost modelling is a method used to estimate the expected cost of a product or service based on its raw materials, labour, overhead, and other cost drivers. Instead of relying solely on supplier quotes, businesses use should-cost models to understand what a fair price should be and identify cost-saving opportunities.
What sources can we use to estimate cost and price breakdowns?
Company Annual Reports
Market Data
Technical Data
RFIs
Plant Visits
Discount Lists
Break-Even Analysis
What is the us of the OWN-IT process?
OWN IT is used for collecting and analysing the data and information required for assessing scope of price and cost
What does OWN IT stand for?
Outline
Wide Search
Narrow Search
Increase your stockpile of information
Transform your stockpile into new knowledge
What are the four steps to creating an outline?
- Be Specific
- Define what is already known
- Create the outline
- Define any gaps
